Transitioning a business: issues to consider when management and ownership change.

• Author: Bird, John
• Position: Money Talk

After spending years building a successful business, the idea of transitioning to new management and ownership can be difficult to accept. However, it must be done eventually and the prepared business owner is likely to experience a far more successful transition. Unfortunately, business owners often contact their professional advisors after the sales process is well along. This is too late. A tremendous amount of value can be added for the owner in the years, months and days leading up to a sales agreement.

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When thoughts turn toward the sale of a company, initial musings gravitate to two main topics: who would buy the business and how much would they be willing to pay?

The Right Buyer

Potential buyers may be internal: current employees or family members already involved in the business. Or they could be external: a financial or strategic purchaser or a competitor in the industry. Each class of buyers will have unique expectations for the entity. The owner should identify in his or her preplanning who potential buyers might be:

* One or more children

* Current employees

* Current co-owners

* Financial buyer retaining current management

* Operating buyer dismissing current management

* A competitor or another business in the same industry

Each of these buyers will view the value of the business differently, and the business owner will likely find that one buyer sees far more value in the enterprise than the others. But selecting the most suitable purchaser may involve more than choosing the highest price. Does the owner hope to remain involved in the company in some capacity? Do they want the current employees and management to continue with the company? Was the purchase offer unsolicited? If so, has the owner shopped the business to other potential purchasers?

The Right Price

Equally important is to choose the best buyer who fully understands the proposed purchase terms. The purchase price may look good, but the terms may leave the seller bearing excessive risk far into the future. A common tenet in the industry is "your price, my terms." In other words, the greater the proposed price the less advantageous the terms and vice versa.

Well in advance of entertaining a purchase offer, business owners should have a realistic idea of the value of their company. How are other businesses in the same industry valued? Are there traditional formulas such as some multiple of EBITDA, revenues or assets that apply? Industry trade...